[PDF]   [Slides]   [Theory Appendix]   [Robustness]   [Data Appendix]

Revise and Resubmit at Journal of Banking and Finance, 2nd round

The paper shows that distressed firms have positive abnormal returns when aggregate volatility unexpectedly increases. This hedging property of distressed firms explains the puzzling negative relation between firm-specific distress risk and future alphas from benchmark asset-pricing models. Controlling for aggregate volatility risk exposure also explains why the negative relation is stronger for volatile firms and growth firms.

[PDF]   [Slides]   [Robustness]   [Data Appendix]

The paper discovers that firm complexity is negatively priced in cross-section. High/low-complexity conglomerates have 35-50/20-28 bp per month more negative five-factor Fama and French (2015) alphas than single-segment firms, and this effect is stronger in subsamples with low institutional ownership, higher idiosyncratic volatility, and around earnings announcements. The complexity effect is robust to controlling for a long list of pre-existing anomalies and seems to be generated by the interaction of higher uncertainty/disagreement about conglomerates (Barinov, Park, and Yildizhan, 2016) and short-sale constraints. The complexity effect seems to be contributing to the diversification discount by slowly eroding the valuations of conglomerates.

[PDF]   [Slides]

Several important anomalies are stronger for more complex firms. Despite conglomerates being on average larger and more liquid than single-segment firms, anomalies are stronger for conglomerates. In the conglomerates-only subsample, anomalies are stronger for conglomerates with more between-segments difference in market-to-book and operating leverage.

(with Hyun 'Shana' Hong, Ji Woo 'Ian' Ryou, and Xiao-Jun Zhang)

[PDF]  

Product market power serves as a natural hedge against adverse shocks and competitive threats, thus increasing managerial risk tolerance of innovation investment. Consistent with that, we find that product market power is positively associated with firm innovation input and output. Additionally, consistent with learning from the leader’s market valuation, we find that firm innovation is positively and significantly sensitive to market valuation of its product market leader, especially if the stock price of the leader/followers is more/less informative. The follower firms alter their R\&D investments based on stock return around their leader’s patent grant dates. The followers mimic innovation investments of their product market leader and private information in leader’s prices is associated with improvement in their future profits. We find that liquidity shocks to leader’s stock price hamper the following firms’ learning. We conclude that product market power promotes innovation and firms learn from product market leader’s market valuation.

[PDF]   [Data Appendix]

Asymmetric timeliness (AT) measure from Basu (1997) regression is priced. Sorting firms on AT produces a 40 bp per month spread in six-factor alphas. The AT effect is driven almost exclusively by the bottom AT quintile, populated by aggressive firms that recognize gains more timely than losses. Investors seem to misinterpret aggressive accounting numbers and are ill-prepared for future negative events. The AT effect in returns in concentrated around earnings announcements, writedowns, and downgrades. The AT effect is also stronger for high limits to arbitrage firms and seems unrelated to liquidity and the business cycle.